"The truth is that high levels of unemployment are historically correlated with higher inflation and low levels of unemployment with lower inflation. That is because an economy that more fully utilizes labor resources is more productive. More production brings down prices."

What??? Leave aside that pretty much everything in the Austrian worldview has been thoroughly refuted by evidence over the past 7 years -actually they will force you to leave it aside as they claim that Austrian economics is pure logic that is not refutable by evidence (handy, isn't it). Just look at the statement and... what???

In his New York Times column, Paul Krugman reports on two new studies, both of which indicate that limiting carbon emissions would be much cheaper than initially thought, and may actually increase economic growth. This would be in part because fossil fuels have negative side effects over and above global warming, in particular health effects that "drive up medical costs and reduce productivity".

Further in his column, he takes a swipe at those on the left who claim that "saving the planet requires an end to growth" (a position he calls "climate despair", such as groups like the degrowth movement and the Post-Carbon Institute. This, he reckons, is in large part due to a misunderstanding of what growth is, where those making such claims probably see it as a "crude, physical thing, a matter simply of producing more stuff, [not taking] into account the many choices -- about what to consume, about which technologies to use -- that go into producing a dollar's worth of G.D.P."

Chapter 12 sees Piketty going global. Having thus far kept a mostly national perspective, he now looks at capital at a wordwide level. That makes sense: colonies aside (and even they fell far short of today's cross-positions), major international investments is a relatively new phenomenon, as is the difficulty of associating a capital to a country.

This is another reason why the elevated levels of r (return on capital) could go on a bit longer: whereas developed countries are awash in capital, in fact probably have too much for their own good, this is not the case of the world as a whole -though the gap is less than one may have thought.

There, Piketty has an extremely interesting line of study. Having shown that the richest people saw their wealth grow faster than everyone else, he examined what caused this divergence (it is true both of highly concentrated and highly diversified massive fortunes, surprisingly) looking at the returns obtained by the dotations of various US universities. The picture is crystal clear: the bigger the amount to invest, the higher the returns it gets.

Right, I have now finished the book, for which I already published two sets of notes on the way (here and here).

However, there is so much material for discussion in the book after the point where I stopped my notes that, to make it a bit more readable, I will split the final notes in two more installments. I therefore return to part 3, looking at inequalities, from Chapter 9 onwards, and will stop at the end of Chapter 11.

Piketty being the specialist of inequality, there is little surprise that he gives a very good description of its historical evolution.

It's hard to pinpoint one thing in particular, but despite having over the last few years read each of his papers or articles that came my way, I kept finding things I did not know, that will probably alter my views of economics and politics in the future, even if I don't necessarily know in what way yet. For instance, I did not realise that Germany's top 1% had a markedly higher share of revenue than in any other continental Europe country. It is also interesting to look at the very different evolutions of minimum wages in France and USA (although that had very little impact on inequality at the very top, which is what took off of late).

Right, I have now finished the book, for which I already published two sets of notes on the way (here and here).

However, there is so much material for discussion in the book after the point where I stopped my notes that, to make it a bit more readable, I will split the final notes in two more installments. I therefore return to part 3, looking at inequalities, from Chapter 9 onwards, and will stop at the end of Chapter 11.

Piketty being the specialist of inequality, there is little surprise that he gives a very good description of its historical evolution.

It's hard to pinpoint one thing in particular, but despite having over the last few years read each of his papers or articles that came my way, I kept finding things I did not know, that will probably alter my views of economics and politics in the future, even if I don't necessarily know in what way yet. For instance, I did not realise that Germany's top 1% had a markedly higher share of revenue than in any other continental Europe country. It is also interesting to look at the very different evolutions of minimum wages in France and USA (although that had very little impact on inequality at the very top, which is what took off of late).

Paul Krugman has recently published a blogpost and a chronicle talking about the evolution of the economics of fighting climate change. In it he states that people of both the left and the right are guilty of fallacies -to be fair he also says that the fallacies of the right are much more serious and damaging.

But we have come to expect that. So let's see what are the fallacies of the left:

"there are some people on the left who keep insisting that economic growth is incompatible with reduced emissions, and that therefore we have to turn our backs on growth." is from the blog post.

Strictly understood, and in a theoretical economics framework, this is of course a fallacy, as you could have plummeting emission intensity (ie, emission per unit of GDP).

Now, let's look at what it means in practice, and when you are not just in an economics framework:

Since being published in English (its original publication, in French, came a year sooner), Thomas Piketty's Capital in the XXIst Century has been heavily discussed - and reviewed.

I would like to comment and start discussions on some of its contents and assumptions. Since there have been questions about it, I will start writing even though I am yet to finish the book. Well, if I were to do it all in one go, it would be far too long a diary in any case. Please note that I am reading it in French, and thus cannot exactly quote the English version. At the point where I am in the book, little has been said of inequalities, which are the subject of part 3.

And it purports to show that politics makes us brain dead because, when presented with a political problem that fits our prejudice (or goes against them), we tend to reply according to the prejudice rather than according to our abilities, in this case a simple maths proportions problem (yes, I am surprised that most people failed the problem in the first place, and that it be called "difficult", go take a look).

In a recent conference about data analysis, I highlighted the importance of being well aware of one's model's assumptions. That all models are wrong should not be a reason never to use them, but you must be acutely aware of what their use implies.

I trust that you would agree with such an observation (OK, some will not want to use imperfect model at all, but that is going too far, and would have prevented any progress in human knowledge). But if you do, you should be pretty worried. Because most developed countries (and probably even more so less-developed ones) are now run on the basis of models whose assumptions are wildly violated -to the point where the rules of such models have made their way into their constitutions.

As I recently wrote about, we are once again hearing calls for selling, well,everything public. And a French nominally (yes, already only nominally) socialist president is announcing a major turn rightwards -economically, that is- despite being at the helm of a country that has been performing markedly better than tenants of Aust(e)rian orthodoxy, such as the Netherlands or Finland.

For decades, many academics and pundits have pronounced that the 70s conclusively proved that Keynes had been completely wrong, and that it proved that Friedman had been completely right.

You see, there was a recession, and it should have created deflation, except if inflation was actually determined by expectations based on previous experience, in which case it would not be brought down by depression. Friedman went on to state that "inflation is always and everywhere a monetary phenomenon" which, if you think twice about it, is the most laughable statement.
And to this day, I keep reading articles, even by professors of economics in the UK, saying that the episode of inflation over 2% in the UK in the early years of the current Government is a clear indication that any stimulus would have had little to no effect, being swallowed by inflation.

That's what happens when you start believing that your model matters more than reality.

Via Paul Krugman, I saw that Larry Summers had given a presentation on the topic of secular stagnation at the IMF conference (admittedly, I wasn't invited this year, well, the letter must have been lost in the post ;-) ). If you'd rather read than watch, Krugman's summary is a nicely written one, and adds a few comments which can be interesting in themselves.

Well, I have not usually been inclined of late to say nice things about Larry Summers, although that was probably more about Summers the political persona. His academic research deserves more credit. So, much of it is interesting, although some of the conclusions he derives (and here Summers the neoliberal may be showing, for instance when he suggests that proper financial regulation may be a bad thing in the context of stagnation, which is bonkers) appear to either be there purely for provocation sake, or to be pre-conclusions looking for a justification. Still, I would have a few things to add, and I believe that the conclusions fall short in a couple of ways.

Reading the New Statesman correspondence section (yes, I know...), I came across a letter referring to a leader that had apparently stated that the UK needed an extra one million houses over the next five years is the level to meet present needs. The letter proceeds to explain via a small calculation that the figure is actually four millions over ten years. So far, so good (or not - I really have no idea about the actual figures, the calculation is worded in a way that might suggest that there is some confusion between yearly need and backlog, and I don't know the source of the numbers used), I don't mean to dispute the need for extra housing in the UK.

But the reader, after apparently making a call for a strong building program (this is about meeting present "needs", not fanciful wishes), then adds:
"A damaged economy cannot afford to allocate such a large share of limited resources to housebuilding."

Greg Mankiw has written an Economics textbook that is very well regarded, and is still the leader in the undergraduate universities market in the US (although Paul Krugman's seemed to be catching up fast). Because of that, a lot of people will like him or, at any rate, not want to appear to have too bad a word for him. Yet there is a point where this becomes enforced blindness.

David Greenlaw, James Hamilton, Peter Hooper, and Rick Mishkin (no, those names did not mean much to me either) have published an op-ed in the Wall Street Journal based on their recent paper on debts, deficits and borrowing interest rates.

Thus far, the sentence reveals nothing extraordinary. What they end up concluding (the most policy-absorbed might have surmised it from where their op-ed was published) was that there was a strong relationship between debt level and interest rates. There is a detailed takedown of the conclusions by Matt O'Brien, so I'll focus on something else. The data they based their conclusion on can be plotted on a graph easily enough, like that:

I've been thinking about regulatory environments lately -finance, insurance, but also medical or IT.

Actually the last two will be relevant to the idea only as illustration. The proposal is about the financial world.

So, as you may or may not know, norms like Basel (2 or 3 at any rate) or Solvency 2 will require a lesser quantity of capital set aside if you have an internal process to evaluate counterparty risk. This process must be pretty thoroughly documented internally (internally is an operating word here) and will be subjected to audits.

As you also know, audit firms are paid by the company that they are auditing. Thus creating the mother of all conflicts of interest.

On Friday (22nd February), Moody's downgraded the UK's credit rating by a notch. That is actually a non-event. Rating agencies clearly play to an ideological agenda (for instance, they consistently give a higher rating to a private company than to a state for a similar level of risk), and it's hard to see in what circumstances the UK, a country with its own central bank emitting fiat money, could default.

What makes it somewhat more interesting is that UK's chancellor, George Osborne, reacted that way :

"Tonight we have a stark reminder of the debt problems facing our country - and the clearest possible warning to anyone who thinks we can run away from dealing with those problems," he said.

"Far from weakening our resolve to deliver our economic recovery plan, this decision redoubles it.
"We will go on delivering the plan that has cut the deficit by a quarter, and given us record low interest rates and record numbers of jobs."
[...]
"As the rating agency says, Britain faces huge challenges at home from the debts built up over many, many years, and it is made no easier by the very weak economic situation in Europe.
"Crucially for families and businesses, they say that 'the UK's creditworthiness remains extremely high' thanks in part to a 'strong track record of fiscal consolidation' and our 'political will'.
[...]
"They also make it absolutely clear that they could downgrade the UK's credit rating further in the event of 'reduced political commitment to fiscal consolidation'.
"We are not going to run away from our problems, we are going to overcome them."

However, Robin Wells (Paul Krugman's partner) need not worry. Tara is actually the impersonation of our rallying cry, There Are Real Alternatives, and of course the arch-nemesis of Margaret Thatcher's frightening offspring, TINA (There Is No Alternative).

Recently, in a diary called Paris by Sven Triloqvist, poemless made the point that some people come to ET and struggle to understand what It is about. Why I find that this patchwork tendency also has an endearing feel to it, I must admit that I have struggled to get people to read ET regularly. And we may sometimes not even explicitly mention some points that we take for granted within our community -but which may be lost on a new reader.

So, I thought I would try to find and word some major tendencies that shape ET. I realize that the "we" in the title can seem presumptuous -after all, it is only I who write. But there are two reasons for it. First, I endeavour to identify common lines of thought -ones that, while we can find an individual frequent contributor who disagrees about any one of them, would probably be each be shared by the great majority of us, and a majority of them should be shared by any one of us. Second, I hope that ensuing discussions will make it that eventually it will be "we" writing.
I was initially going to have all topics into one diary, but quickly saw that it would be way too long -besides, I probably am not settled on the list yet.